April 27, 2005

The great book The Millionaire Next Door (which, BTW, you should read if you like anything I have to say) talks about people who become millionaires. (Guess the title makes that clear, huh?) Anyway, the book says that the key to being wealthy is for a person to play both good offense (make a lot of money) and good defense (spend little and protect what they have). The heart of good defense is insurance and estate planning. It’s also the heart of Principle 5 which says:

Protect the value of your assets

In order to be financially solid, you must protect your largest assets – your home (house insurance), your car (auto insurance), and your income (disability, medical, and life insurance). In addition, you must protect them even beyond your life -- that's why we'll discuss wills in this section.

Unfortunately, the areas of insurance and estate planning have four big negatives associated with them:

They're boring.

They're confusing and complicated.

They aren't urgent -- many people put them off for a long time and don't see any ill effects. (until one day...)

No one wants to talk about financial issues that deal with them either being hurt or dead. They think it's bad karma.

I can't promise that I'll make this topic exciting, but I will work to make it so simple that even I can write about it. If you'll promise to at least listen to what I have to say, perhaps together we can overcome all these objections and make sure you're taking care of all the issues associated with Principle 5.

April 25, 2005

For many people, their home is the single biggest investment that they’ll ever make. And that’s a good thing. Home prices tend to go up over time, so while your mortgage is going down over 30 years, the value of your house is going up. This has a double positive impact on your net worth (increasing assets and decreasing liabilities) and leaves you with more money.

Principle 4 tells us to:

Invest in appreciating (or at least neutral) assets only.

This includes things like a house, a small business, or rental property. On the flip side, this principle also advises us to avoid those assets that decline quickly in value – like new cars. As we explore this principle, we’ll discuss these issues and how to address them.

April 21, 2005

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April 20, 2005

Not only do Americans have a hard time keeping expenses in line (Principle 2), but they go one step further, not only spending all they make, but spending more than they make. Consider these facts from Debtguru.com:

The majority of consumer borrowing, about 63%, is represented by so-called "non-revolving" debt such as automobile loans. But "revolving" credit, which most typically involves credit cards, is an increasingly significant part of the equation. Revolving debt currently totals $735.3 billion; that's about 31% higher than it was only five years ago. The figure has more than doubled in a decade.

The average amount of credit card debt in households with more than one card is now more than $8,000, according to CardWeb.com. That’s 167% more than the $3,000 average for households in 1990.

The most unsettling aspect of all these credit card transactions is that many Americans don’t see their income as a spending cap. About 43% of U.S. families spend more than they earn, according to a Federal Reserve study. And on average, Americans spend $1.22 for every dollar they earn, according to Myvesta.org.

Personal bankruptcies have doubled in the past decade.

American consumers owed a grand total of $1.9773 trillion in October 2003, according to the latest statistics on consumer credit from the Federal Reserve. That’s about $18,654 per household, a figure that doesn’t include mortgage debt. The number is up more than 41% from the $1.3999 trillion consumers owed in 1998.

The number of personal bankruptcy filings in the fiscal year ended Sept. 30, 2003, rose 7.8% from the same period in 2002, reaching 1,625,813, according to the American Bankruptcy Institute (ABI). That’s twice the number of people filing for personal bankruptcy protection in 1993.

The amount of debt as a percentage of personal income tends to track bankruptcy filings, the ABI said. And the amount of debt payments as percentage of income has steadily increased in the last 10 years, according to the Federal Reserve.

Unfortunately, I could go on and on. The situation is very bad. That's why Principle 3 is:

Control liabilities – eliminate liabilities and limit or eliminate borrowing of any kind

We must eliminate liabilities and limit or eliminate borrowing of any kind. In short, we need to get and stay out of debt. This includes all kinds of debt.

Nasty credit card debt, hurtful debt, depreciating assets (can you spell c-a-r?), and on and on. As we talk about Principle 3 over the next months, we'll give some handy tips for dealing with debt.

April 18, 2005

Though this is Principle 2, it’s probably the most important principle of the group. It’s certainly the most ignored principle of the five, but it’s the one principle that people have the most control over and the one that can make the greatest impact on their financial futures. Principle 2 is, quite simply:

Minimize Expenses

You’ve probably heard the saying that you should “live on less than you make”. It’s a true saying, but unfortunately one that many people don’t follow. But we’re not going to let that stop us from sharing hundreds, if not thousands, of ways that you can minimize expenses, cut spending, and save money. In fact, I wrote a book about this (my only book to date – I’m so proud of it!) because this topic is so important. If you stick around, you’ll get all the knowledge from the book without having to pay for it. Now that’s saving money!

April 15, 2005

As discussed in the last post, your personal financial health comes down to five simple principles. That’s it. Just five.

However, it’s not that easy. (It never is.)

These five all have significant sub-points. So over the next few days, we’ll take each of the five principles and describe these sub-points.

Principle 1 is to “maximize income from all sources”. In order to maximize your income from all sources, you must:

Get as much education as possible – the more meaningful education you have, the more money you’ll make.

Manage your career like an asset to maximize your happiness and income.

Consider generating more cash by starting your own business, getting a second job, turning a hobby into a cash business, or being creative like renting out a room in your house.

Make your money earn money through investing wisely.

Yes, there are exceptions to all of these. Bill Gates didn’t get 30 years of education. Warren Buffet doesn’t have a second job (and though he likes bridge, I don’t think he’s turned it into a money maker), and Ross Perot doesn’t have a co-ed living in his basement (at least to my knowledge he doesn’t). So while there are exceptions to the rule, generally, for the vast majority of people out there, these hold true.

And since they impact almost all of us, we’ll be talking about them quite frequently as we learn to follow Principle 1.

April 14, 2005

Now that we’ve covered the basics of net worth, we’re ready to really get to some meat! I may ramble a bit here, but I’ll try to stay on message. Stick with me even if I do sway a bit – I think it will be worth it. (you math majors may love this a bit too much.)

As stated in the last post, the net worth equation is as follows:

Assets – Liabilities = Net Worth

From this, a reasonable question is “where do assets come from?” Good question. I’m glad you asked.

Assets are what’s left over after you make your income (from a job, business, rental property, investments, etc.) and pay off expenses (housing repairs, food, clothing, insurance, and on and on.). BTW, why does it always seem like the expenses list can go on forever, but the income list only has a handful of possibilities? The cards are stacked against us from the start! But never fear – we will overcome the stacking!!!!

Now, back to reality.

This is how net worth is accumulated after each pay period:

• Income comes in (hence the name “in come”)• Expenses are paid with income• Liabilities (car payment, house payment) are paid down with income• Whatever is left over is added to assets• Total remaining liabilities are subtracted from this to give you a new net worth

Assets are cumulative in nature. For instance, if you have $10,000 in assets on January 1, and during the year you have income of $50,000 and expenses of $45,000, you have a net increase in assets of $5,000 ($50,000-$45,000) for the year. Add this to your starting net worth, and your new net worth is $15,000 ($10,000 + $5,000).

Because of this relationship, we have a new addition to our equation. Our restated net worth equation is:

(Income this year – Expenses this year – Payments on liabilities this year) + (Assets or the value of what I started with)) – Remaining Liabilities = New Net Worth

I hope I’m making sense to someone out there – because now I’m confused!?!?!?!

But let me simplify (for my own sake). There are really only a handful of ways to increase your net worth. They are:

• Make sure your income covers your expenses and current liability obligations with plenty left over• Your current assets maintain their value (or even grow in value)• You don’t keep borrowing more and more money

These can be further simplified into general principles that we’ll cover (over and over) in this blog. If you do these five simple things, you will see a radical increase in your net worth in a short amount of time. The five principles to an increasing net worth are:

1. Maximize income from all sources2. Minimize expenses3. Control liabilities – eliminate liabilities and limit or eliminate borrowing of any kind4. Invest in appreciating (or at least neutral) assets only5. Protect the value of your assets

I know, I know. Pretty simple stuff. I told you in the first post that personal finances were actually pretty easy when it all boiled down to it. It’s the “experts” that want to make them hard.

April 13, 2005

Now that I have the obligatory “what this site is about” entry completed, I can start to get down to business. As Stephen Covey would say, let’s “start with the end in mind.”

The “end” here is our net worths – yours and mine. Net worth is simply all of your assets added up to get a (hopefully) big number from which is subtracted all your (hopefully smaller) liabilities – like debts. This leaves your net worth – what you’d have left if you sold everything you had and paid off everything you owed.

Let’s do a simple example so we’re all on the same page. Let’s say Mary owns her home that’s worth $200,000. She owns nothing else. If she has a mortgage of $50,000 (and no other debts), her net worth is $150,000 ($200,000-$50,000). At least in theory. Yes, she’ll have selling costs and the like, but this is just a simple example to illustrate a principle. You get the idea.

If you need a bit more information on net worth (or are just a net worth junkie and crave articles on it), review the set of posts from JLP at AllThingsFinancial on the subject. He has a five-part series on net worth that is really great. Here they are: Part 1, Part 2, Part 3, Part 4 and Part 5. We'll cover a lot of this later, but some of you might want more information now.

The net worth (assets minus liabilities) of households increases with age until age 74 and declines somewhat from age 75. The median net worth of the elderly households (with a householder aged 65+) in 2000 was $108,885 as compared to $55,000 for the total population. The largest asset type is home ownership which accounts for $85,516 or 78.5% of this net worth.

Ok, let’s do the math. The elderly have an average net worth of $109k of which $86k is tied up in their houses. That means they have just over $20,000 in liquid net worth at most. Yikes! That’s not much. And look at the other number – $55,000 is the average net worth. Pitiful. But it gets worse.

Here’s another article (though a bit dated, it’s not that old) from America Saves. They say:

One study, conducted for the Consumer Federation by an Ohio State University consumer professor, showed that the average household in 1998 (the most recent data available from the Federal Reserve) had a net worth of $71,700, mostly from home equity.

But that same household had only $9,850 in net financial assets, including retirement money. And households with income under $25,000 had net financial assets of just $1,000.

Is it any wonder we’re in such sad shape? We spend like crazies (I’ve heard it said that if you’re an average world citizen you spend 98% of what you make – unless you’re an American and then you spend 110% of what you make), we live like crazies (I’ve heard it quoted that the average family is three paychecks away from financial trouble), and we don’t save (we do the opposite – we borrow). It’s a very sad situation.

We (you and me) are here to change that through this site. We’re here to help all of us increase our assets and decrease our liabilities – which, of course, will increase our net worths by default. And even if the affluenza-influenced masses don’t follow us, we’ll be the ones who will be laughing in the end since we’ll have solid financial futures. Stay tuned fellow net worthers.

April 12, 2005

Thank you for visiting FreeMoneyFinance.com. Financial decisions are among the most important lifetime decisions to most people, and I hope by sharing my experiences and learnings, more people can start to make better personal finance decisions.

FreeMoneyFinance is a free service to everybody, and as I don’t receive anything from you nor promise anything to you, I disclaim any liabilities whatsoever from your decisions based on or influenced by this site. Furthermore, if you use any information in this web site in any manner, you automatically consent to the following rules:

Rule 1. Don’t rely on anything in this website for your financial moves. The materials on this web site have been prepared for informational purposes only and are not intended to be construed as financial advice. While I always make efforts to put each of my decisions into perspective in this blog, you should understand that rational financial decisions can only be based on each individual’s personal situation, and by default you should assume most of my decisions may not work for you.

Rule 2. I am not your financial advisor. Reading this web site does not establish any kind of advisor-client relationship between us and I don’t have fiduciary duty for anyone whatsoever. If you are uncomfortable making your own decisions, you should always go to a financial advisor for suggestions to your specific financial situation. I welcome your email (you may email me at FMF@FreeMoneyFinance.com) but again, any email communications between us does not constitute any advisor-client relationship either.

Rule 3. I am not using this web site to promote anything. You should understand I may own shares or have financial interest in the companies, products, services or financial tools I discussed in this web site, but I have no intention to sell anything to you. If I discuss some products or services in this blog and make a recommendation, that's because I truly believe these products or services really provide meaningful value to ordinary consumers. If I will gain financial interest from a referral or alike, I will make efforts to disclose how much I will receive and in which manner to help you make a better decision. However, in no case can I guarantee the performance of every product and service I discuss, and I am not liable for any of your loss from trying these products or services.

Rule 4. Advertisements will appear at FreeMoneyFinance.FreeMoneyFinance partially relies on certain advertisement income to offset certain expenses. Once expenses are covered, all profits from advertising will be given to charity.All ads will be clearly marked. FreeMoneyFinance does not endorse any advertisement. Please always use your best judgment while picking up financial products.

Rule 5. All rights are reserved. The original material on FreeMoneyFinance.com is protected by copyright law and you cannot reuse or adapt the content in any manner without explicit written consent from me. If you want to discuss how to use content at FreeMoneyFinance, please contact me at FMF@FreeMoneyFinance.com.

April 11, 2005

You also know that I have no qualifications as a financial advisor.But I do have some reasons why you may want to read what I have to say.It’s up to you.

As I close the introduction portion of this site, I want to let you know a few things you can expect from it:

I promise that I’ll shoot straight and give you my honest opinions.

I promise to tell you what’s worked for me, what hasn’t, and if I don’t know anything about a topic (like tax rates on foreign oil investments in South America), I’ll tell you.

I promise that you’ll probably hear a lot of things that your mom or dad said, but you know what, mom and dad were right in many cases.

I promise you won’t hear the latest get-rich-quick scheme, hot stock tip, or how to borrow your way to prosperity (unless you hear me telling you about how these are bad ideas).

I promise I will give plain, simple advice that if you follow it, will consistently increase your net worth.

I promise the site will feature articles, links to great sites, interviews with people who have something good to add, reviews of products, and anything else I can come up to help you increase your net worth.

I promise that just for fun, I may throw in some wacky stuff once in awhile – like an article on my Indianapolis Colts, an update on the NASCAR Nextel Cup Championship, the details of the latest chess world championship, the exploits of my favorite bike team, or a review of how my rose growing hobby is going this summer.I want to keep us all on our toes and break up the money-talk every once in awhile. J

It should be a fun and rewarding time.I invite you (and your friends, family, and business associates) to join me. I hope you will visit frequently, add your comments, and tell your friends and family about the site that offers free and simple advice on money and finance designed to maximize your net worth.

April 08, 2005

You also know, that I’m not qualified to give advice on this topic. (See yesterday’s post)I’m not professionally trained in financial management.I’m a layman in this field.

However, there are a few reasons I am semi-qualified to address this subject:

First, I have undergraduate and master’s degrees in business.(Though these didn’t teach me anything about managing money.)

Second, I have authored over 100 articles on finances over the past seven years that have appeared in many nationally recognized magazines.At least a few editors think I know what I’m talking about.

Third, I have written a book on saving money – one of the best ways to increase your net worth. (much, much more on this topic will follow in the months to come.)

Fourth, I have coached people on their finances over the past decade, helping many to get out of debt and get on the right path to increasing their net worth.

Fifth, in the course of the past several years, I’ve read a gazillion books on personal finances, watched endless news reports, poured over countless magazines, and consulted many websites daily in search of financial wisdom.In other words, I’m self-trained.

But the best reason I can give you for why you might want to read what I’m writing is this:

Over the past 20 years, I have managed my own finances so that my net worth now places me in a very good position versus the average American.I started with nothing and while I’m not “rich”, I am doing well.And what I did (and continue to do) can be done by anyone.That’s what I’ll be sharing here.

April 07, 2005

Yesterday I talked about the reason behind the reason for this site.Basically, it boils down to the fact that the financial media today is more worried about making your money their money than anything else.

I also promised to tell you why you should listen to me instead of listening to them.The reason: You shouldn’t.

I am not a financial expert.I do not have a professional degree in finances.I do not work in the financial products industry.In other words, you may find my advice to be worth what you pay for it. (the “free” in the name of the site.)In other words, use this information at your own risk.

If you still want to stick around, stop by tomorrow when I’ll share a few reasons you may want to hear what I have to say.Hope to see you then.

April 06, 2005

The current state of personal financial media/information/data (or whatever you want to call it) is dismal.It’s full of a bunch of sales people (“experts”) who want to:

1) Overcomplicate the facts so the average person thinks he/she can’t possibly manage it alone

2) Want to make “your” money “their” money (or at least take part of what you have to give you “valuable” advice)

3) Don’t know much about personal finances.

I’ve found that there is a lack of financial wisdom, real wisdom, out there that is simple and easy to implement.Therefore, this site is an attempt to talk about finances in a simple, easy-to-understand manner that allows the reader to manage his or her finances without a lot of effort.

All of this, of course, begs the question: How are you any different from the “experts”?

I’ll get to that tomorrow.For now, I just wanted to share with you my reason behind the reason.Stay tuned.

April 05, 2005

Welcome to a new financial adventure!I’ve wanted to put my thoughts down on this topic for some time, and I’ve decided that now is the time.I hope someone out there joins me (and helps me out with these thoughts by commenting/setting me straight), but if I remain alone, I’ll still get a lot out of this effort.

This site is about one simple thing: growing your net worth.

All financial topics are subsets of net worth, and this blog will talk about them – but always with the goal in mind of increasing your net worth – making you (and me!) better off financially.

You may have some questions about me and the site, and I’ll be addressing these over the next few days.For now, I just want to say welcome to Free Money Finance.Thanks for joining me.

April 01, 2005

Over the course of time, some of you may want to contact me.That would be great – please do!

You can reach me at fmfblog [at] gmail [dot] com (replace the [at] with "@" and [dot] with ".").

For those of you unfamiliar with listing emails this way, it's designed to help stop spambots from "harvesting" my email.

For those of you contacting me about ads, affiliate offers, content suggestions and the like, if you send me a note and I do not respond, that means I'm not interested. There's no need to re-send or keep badgering me. I will not respond and am not interested. Sorry to be so harsh, but as you might imagine I get quite a few emails like these. I respond to very few because I am simply not interested.